“I always tell students in business school they’d be better off when they got out of business school to have a punch card with 20 punches on it. And every time they made an investment decision, they used up one of their punches, because they aren’t going to get 20 great ideas in their lifetime. They’re going to get five or three or seven, and you can get rich off five or three or seven. But what you can’t get rich doing is trying to get one every day.”
Being an all-time opponent for diversification, Warren Buffett (Trades, Portfolio) often referred to his 20-slot rule in front his audiences who aim to be enterprising investors, as exemplified above. We see a few benefits and rationales coming out of this type of strategy, such as the following:
- Wonderful businesses
- Investment decisions would be well-thought-out
- Trading being less active, meaning lower costs and fewer mistakes
- Long-term thinking would be reinforced
- Index-hugging would be avoided
At Urbem, we are a big fan of running a highly concentrated portfolio investing in the global stock market for our investment partnership. Although not confining ourselves to 20 slots for the lifetime, we feel it a good exercise to sit back and think critically through the stock-picking process in light of building a limited-slot portfolio. Essentially, the end goal here is to find long-term high-return bets. Accordingly, our strategy would emphasize sustainable competitive edge and megatrend-driven growth opportunities. Meanwhile, due to the limited numbers of bets afforded, we would place more focus on extremely predictable and stable domains and easy-to-understand businesses that "can be even run by an idiot.”
Century-old businesses are one good source to find long-lived assets. According to the Lindy Effect, the mortality rate of a non-perishable thing, such as technology or brand name, decreases as its history lengthens. For instance, global premium alcohol drink giants Diageo (LSE:DGE, Financial) and Brown-Forman (BF.A, Financial) (BF.B, Financial) both own an enviable portfolio of iconic brands, including Johnnie Walker, Jack Daniel’s, Guinness and Smirnoff, all of which have existed for more than a century now.
Leveraging a brand-based moat, these companies consistently generated superior shareholder returns with a straightforward, proven business model alongside a worldwide megatrend of premiumization. While we certainly cannot predict the future, it should be an easy call for us to choose to bet for their survival compared with rapidly-changing technologies, trendy fashions, novel inventions, innovative business concepts and so forth.
Besides premium alcohols, the luxury goods and tobacco sectors are also commonly filled with enduring businesses, such as Louis Vuitton (XPAR:LVMH, Financial) from 1854 and Philip Morris International (PM, Financial) from 1847. Maybe this group can tell us a lot about human nature, and which tastes are unlikely to change over time.
From the perspective of ultra-long-term prospects, we may also want to look for products and services that make our world a better place to live. In this regard, multiple tailwinds are shaping the future, most notably healthy living. For example, consumers worldwide may demand more sanitation services from Ecolab (ECL, Financial), hygiene products from Clorox (CLX, Financial) and skincare solutions from L’Oreal (XPAR:OR, Financial). As the world economy improves, more people will have time to enjoy recreational activities, which could benefit companies like Nike (NKE, Financial).
What would your 20-slot portfolio look like? Feel free to comment below.
Disclosure: The mention of any security in this article does not constitute an investment recommendation. Investors should always conduct careful analysis themselves or consult with their investment advisors before acting in the stock market. We own shares of Philip Morris International, Clorox and Nike.
Read more here:
- Urbem's 'Megatrend' Series: Healthy Living
- Verbification: A Testimony for a Moat
- Customer-Winning Products: The Core Path to Long-Lasting Prosperity
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